Great Depression vs Great Recession Essay

In 1929 a severe worldwide economic depression known as the “Great Depression” began. The Great Depression lasted until the late 1930s, early 1940s. The depression started in the U.S in September of 1929 with a decline in the stock market that later collapsed on October 29, 1929.

In the 1920’s the United States economy was thriving. Stocks were bought using credit without worry because values kept increasing. In the 1920’s all investments did well. During this time period there were not government regulations on the purchase and sale of stocks, the value of the stocks resembled little the actual health of the specific industry issuing the stock. Beginning on September 3, 1929, stock prices peaked and then dipped sharply. This continued throughout September and into October. On October 24th 13 million shares changed hands and values collapsed. Tuesday, October 29, 16 million shares were put up for sale without buyers. The stock market collapsed. The collapse of the U.S stock market had devastating effects in almost every country. It affected the lives of every American rich and poor.

There were many reasons that caused the Great Depression. The stock market crash that occurred on Black Tuesday, October 29, 1929 was one of the major causes that led to the Great Depression but it wasn’t the only reason. “Two months after the original crash in October, stockholders had lost more than $40 billion dollars. Even though the stock market began to regain some of its losses, by the end of 1930, it just was not enough and America truly entered what is called the Great Depression.” More than 9,000 banks failed throughout the 1930s. During this time banks did not insure deposits, when the banks failed the customer’s money was lost. The banks that were able to stay afloat were too terrified of the existing economic situation to create new loans which lead to less expenditure. The Government created the Smoot-Hawley Tariff in the 1930s. This tariff charged a high tax for imports which lead to a decline in trade from foreign countries. With the crash of the stock market and the failure of banks people, rich and poor, stopped purchasing goods. With the decline of goods and services demand, the supply as also reduced causing a significant need for labor. As jobs were lost people could not afford to make payments on items bought with credit. The unemployment rate in the United States rose to over 25% and GDP declined by almost 33%.

America’s entry into War World II in 1941 brought the United States out of the depression. Government spending in preparation for the war accelerated the recovery. In 1941 the unemployment rate declined to less than 10%. “In the U.S., massive war spending doubled economic growth rates, either masking the effects of the Depression or essentially ending the Depression. Businessmen ignored the mounting national debt and heavy new taxes, redoubling their efforts for greater output to take advantage of generous government contracts.”

When comparing the Recession to the Great depression there are many similarities and differences. The depression and the recession were both preceded by rapid credit expansion and financial innovation that led to high leverage. The credit boom in the 1920s was more national as opposed to the 2004-2007 boom which was global. Liquidity and funding problems played a key role in the financial sector transmission in both episodes. Concerns about the net worth and solvency of financial intermediaries were at the root of both crises, although the specific mechanics differed given the financial system’s evolution. During the Great Depression, bank deposits were lost as banks failed. In the current crisis, deposit insurance has prevented bank runs by retail depositors. Funding problems developed with financial institutions reliance on wholesale funding particularly those issuing or holding US mortgage-related securities whose value was hit by increasing mortgage defaults. “Unlike in the Great Depression, when countercyclical policy responses were virtually absent (with the exception of the sterling block going off gold in 1931), there has been a strong, swift recourse to macroeconomic and financial sector policy support in the current crisis.” The table below highlights some of the major differences between the Great Depression and the current recession.

Great Depression vs. Great Recession

 

Great Depression

Great Recession

Bank Failures

9,096-50% of all banks

57-.6% of Banks

Unemployment Rate

25%

9.50%

Economic Decline

26.50%

-3.30%

Biggest Decline in Dow Jones Industrial Average

-89.20%

-53.80%

Change in Price

-25%

0.05%

Emergency Spending Programs

1.5% of GDP for 1 year

2.5% of GDP for 2 years

Increase in money supply by Federal Reserve

17%

125%

Source: FDIC, Federal Reserve; Commerce Department; Dow Jones; Christina Romer, Obama economic adviser, “Lessons from the Great Depression for Economic Recovery in 2009” (March 9) and JEC testimony

A depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, price deflation or hyperinflation, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile/erratic relative currency value fluctuations, mostly devaluations. The characteristics of a recession include the decline in overall economic activity such as employment, investment, and corporate profits. Recessions are the result of falling demand and may be associated with deflation, inflation or a combination of rising prices and stagnant economic growth. The rule of thumb of economist today is that a recession is two quarters of negative GDP growth and a depression is a 10 percent decline in gross domestic product GDP.

I think that it would be difficult to say that a depression could never happen again in the future but it would take a lot more to send us into one. Throughout the history of the U.S the stock market has crashed and housing bubbles have burst without the U.S falling into a depression. I feel that it would take a variety of factors to let the United States go back into a depression, with policies in place such as unemployment insurance, social security payments and larger government at the federal, state and local levels keeping money flowing into the economy even as consumers and businesses pull back on their own spending this would be depression would be an unlikely event. “There’s a lot more safeguards in place,” said Keith Hembre, chief economist at First American Funds. During the Great depression the money supply swelled, throughout the recession the Federal Reserve has pumped trillions of dollars into the economy with new lending programs the bank had never tried before. That has swelled the supply of money. As referenced above, in the 1930s the government charged high taxes on imports which lead to a huge decline in foreign trade. The government has not made this mistake again.